NEW YORK (
) -- Home prices rose 12.2% year-over-year in May, according to the widely followed Case- Shiller 20-City Composite Index.
But the index may be overstating the extent of home price appreciation according to Zillow economist Svenja Gudell.
In a blog
published Tuesday, Gudell argued that the Case- Shiller Indices are giving an "inflated sense of national home value appreciation" because they are biased towards the large, coastal metro areas that are currently seeing large gains.
Trulia economist Jed Kolko previously made a similar point in his
on how the various housing indices are structured.
According to Kolko, the New York and Los Angeles metros together account for 48% of the Case-Shiller Composite 10 index and 35% of the Composite 20 index (based on weights in the published methodology).
Gudell stressed that the Case-Shiller indices do not adjust for foreclosure sales. The share of foreclosure sales is declining so the index is likely improving simply because a different mix of homes -- more conventional, less distressed -- are being sold.
Foreclosure discounts to market prices are also narrowing in rapidly rising markets. As a result, the index is given an artificial boost and does not really the actual market improvement.
Zillow's own Home Value Index does not include foreclosure sales. Zillow expects home prices to show year-over-year increases of 5.8% for June, with price gains likely slowing to 5% between June 2013 and June 2014.
The Home Price Index from LPS also adjusts for the discount of foreclosure sales. According to LPS, home prices rose 7.9% year-over-year in May, still lower than the Case-Shiller Index.
Zillow forecasts the Case-Shiller Indices every month. Because its Zillow Home Value Index and foreclosure data is available a month in advance of Case-Shiller, it says it is able to reliably forecast the S&P Indices.
Zillow forecasts the S&P Case-Shiller 20-City Composite Index to show another 12.1% annual increase in June.
But don't you go believing it.
-- Written by Shanthi Bharatwaj New York.